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Category Archives: Self Storage

Self-storage property owners have increased their income this year because they are enjoying the best of both worlds—lower vacancies and higher rents. In fact, increased rental rates haven’t deterred customers, so owners continue to lift unit rates higher every few months to see how high they can lift the ceiling.

The industry has about 91 percent occupancy, with the rental rates averaging just more than $87 a 100-sq.-ft. ground level, non-climate-controlled unit, the asking rate matching the peak following the housing collapse in 2009. Rental income in second quarter 2013 was up about 4.1 percent from a year prior, says R. Christian Sonne, executive managing director at the company and author of the Self Storage Performance Quarterly report.

“We used to have, on average, about 1,000 new properties being built a year nationwide, this year there’s only 117,” Sonne says. “For self-storage, the two pillars of success are population growth and time, and that’s happened. With little new building and high demand, the owners can raise rents whenever they want—and they are.”

Marc Boorstein, principal of Chicago-based MJ Partners Real Estate Services, said in his recent second quarter report that the low homeownership rate, which is still down about 4 percent from a decade ago to 65.1 percent, means that there’s more people renting. Homeowners tend to move, the typical time a storage unit is needed, a lot less than renters, Boorstein said.

Boorstein said the main four public REITs: Public Storage, Extra Space Storage, CubeSmart and Sovran Self Storage Inc., saw revenues grow 5 percent to 9 percent in the second quarter. This compares sharply to the performance of all four in the second half of 2009, where revenues dropped to negative 6 percent, according to the Cushman & Wakefield report. Revenue rocketed up starting in the first half of 2010, and hasn’t dropped or plateaued since.

However, REITs still only make up a small percentage of self-storage ownership, with private owners still the majority owners of most properties. The trusts have been trying to increase market share, but there’s just not that much being offered, Sonne says. “There’s been about $2 billion in portfolio acquisitions in the past couple of years, including Storage Deluxe’ $560 million East Coast portfolio sale to CubeSmart last year. They are trying to find portfolios, but there’s just not that much out there.”

In a recent deal where trusts have succeeded, Glendale, Calif.-based Public Storage was reportedly the winning bidder last week to acquire Harrison Street Real Estate Capital’s joint-venture stake in a 43-facility portfolio owned by Matthews, N.C.-based Morningstar Properties LLC for $315 million. Private investors are still trying to jump into the self-storage sector, Sonne says, though the niche label is hard to overcome.

“We’ve seen huge interest by companies such as Prudential, Heitman, Blackstone, Starwood Capital and retirement fund firms,” he says. “Self-storage had the lowest loan loss of any other sector during and since the recession, and the highest consistent returns. We’ve also seen interest from cross-over players, by those who invest in apartments on the private equity side; the Carlyle Group, for example, is looking for the right partner to get into self-storage. With the few new properties coming online in the next 18 months, our forecast for the sector is pretty strong.”

In the past, self-storage properties were often overlooked by investors, but that’s not the case anymore. While many other sectors of commercial real estate were hit hard by the recession, the self-storage industry weathered the storm with minimal damage. As vacancy rates fall and rents grow, investor demand for self-storage properties continues to rise.

Strong fundamentals

“Self-storage isn’t as glamorous as a high-rise office building or a mall,” said Michael Scanlon, president and CEO of the Self Storage Association. “We’ve always been relegated to secondary status in the commercial real estate industry. However, during the recession, many of the big segments took a nosedive, and self-storage sagged a little but didn’t take the same nosedive.”

Fundamentals have really been improving during 2013, which is a continuation of the last couple of years, said Ryan Severino, senior economist at Reis. Vacancy dropped from 14.9 percent at the beginning of the year to 12.6 percent in the third quarter, he said. Asking rents have grown 2.1 percent year-to-date.

In 2014, vacancy rates are expected to drop by another 80 basis points, and asking rents are expected to grow by about 2.8 percent, Severino added.

“The self-storage sector is sneaky big,” Scanlon said. “In 2013, all 30 teams in the NFL generated $9 billion in total revenue, while the music industry generated about $21 billion, and self-storage generated $24 billion.”

Increase in supply

During the last couple of years, 300 to 400 new self-storage facilities have been constructed, Scanlon said. With the economy continuing to improve, it’s estimated that as many as 800 new facilities will be constructed in 2014.

“Supply is increasing relative to where it’s been the past few years, but I don’t see it being an impediment to the market’s recovery,” Severino said. “We expect to see vacancy rates continue to trend down, which means we expect to see net absorption outpacing new construction.”

Despite the amount of properties being developed, building a self-storage facility can be tricky, Scanlon added. For most investors today, due to soaring construction costs it’s cheaper to buy a facility and fix it up than to build.

“When we started, we used industrial-zoned land in heavy commercial areas for self-storage facilities,” Scanlon said. “More recently, we are building in light-commercial and semi-residential zoned areas, and we’ve had to build them with more curb appeal.”

Investor demand increases

“We are now a mainstream part of portfolios that are involved in commercial real estate,” Scanlon said. “People are hedging their bets by putting some money in self-storage.”

Investors who are interested in entering the self-storage market should consider finding a facility they like and asking to invest in the owner’s next property, Scanlon said. “Country club money is how a lot of small operators get their money to build or expand,” he said.

Before purchasing properties, investors should perform a full audit, said Scott Zucker, partner at WZEM. “It’s important to have a good idea of what’s going on inside the facility and who the tenants are,” he added.

Access to the property and new developments around the area are also important factors to take into consideration, Zucker said. “Curb cuts are there so trucks can access the property,” he said. “If there’s a lot of development in the area, road access and access into the property can be affected.”

Cap rates for self-storage are about 6 percent for class-A properties, 7 percent for class-B properties and 7.5 percent for class-C properties, Severino said. In comparison, mean cap rates for apartments are about 6.4 percent, and cap rates for retail are about 8.1 percent.

“Investors are still being choosy about what they buy and sell,” Severino added. “Transaction volumes for all property types are down relative to what they were before the recession. Even with that selection bias, self-storage holds up well relative to the other property types.”

The entire episode on the self-storage industry is available for download atwww.CREshow.com. Michael Bull, CCIM, is the host of the nationally syndicated Commercial Real Estate Show and founder of Bull Realty, Inc., a U.S. commercial real estate sales and advisory firm headquartered in Atlanta.